Relationship Between Customer Satisfaction, Loyalty & Profitability

Journal of Marketing Management, 2006,22, 245-266

0yvind Helgesen^ Are Loyal Customers Profitable?
Customer Satisfaction^ Customer
(Action) Loyalty and Customer
Profitability at the Individual Level
Customer loyalty is supposed to be positively
related to profitability. The link between
satisfaction, loyalty and profitability is perceived to
be so self-evident that tlte relationship often is taken
for granted. Nevertheless, only a fezo studies have
examined this fundamental relationship. Here the
focus is on the individual customer with respect to
the links between customer satisfaction, customer
(action) loyalty and customer profitability. Tlie
following hypotheses are tested; HI: The more
Aalesund University College satisfied a customer tends to be, the higher is the
loyalty of the customer; H2: Tlie more loyal a
customer tends to be, tlie higher customer
profitability is obtained. As expected, the results
provide strong support for the hypotheses.
However, the relationships between the variables
seem to he non-linear (increasingly dmonward
sloping), and only valid beyond certain levels or
thresholds. Besides, the explanatory powers of the
individual variables are rather law.

Keywords: customer relationship orientation, customer satisfaction,
customer loyalty, customer profitability, satisfaction-profit chain .^

Introduction

Customer profitability is supposed to be positively related to customer
loyalty and customer satisfaction. This link between customer satisfaction
and profitability forms the cornerstone of the marketing concept. And the
lesson is that firms should be striving to meet the customers' needs, desires
and requests. Thus, according to this way of thinking, the companies that are
able to increase the satisfaction of the customers can in the long term expect a

1 Correspondence: 0yvind Helgesen, Ho^kolen i Alesimd, Institutt for Intemasjonal
Markedsf0ring (IIM), 6025 Alesund, Norway, Telephone: ++ 70 16 12 18, E-mail:
oh@lnals.no

ISSN0267-257X/2006/3-4/00245 + 21 £8.00/0 ©Westbum Publishers Ltd.

246 0yvind Helgesen

positive effect on the firm's profitability (e.g. Felton 1959; Ames 1970;
Bagozzi 1975; Gr0nroos 1990).
The positive relationship between satisfaction and profitability is
perceived to be so self-evident that it is taken for granted by many.
Consequently this understanding may be called "the paradigm of customer
satisfaction". In spite of the fact that this understanding has gained
popularity, the reality is that only a few studies have been analyzing this
fundamental link. Thus evidence for this "much talked about relationship" is
questioned (Foster and Gupta 1994; Oliver 1996; Zeithaml 2000).
The purpose of this article is to offer some evidence for this "satisfaction-
profit chain" (Anderson and Mittal 2000). The focus is the relationships
between customer satisfaction, customer loyalty and customer profitability at
the individual customer level. The context is the order-handling industry:
four Norwegian exporters of fish products and their customers. This industry
is suitable as context for this study, cf. the discussion below.

Literature Review

In a market-oriented business one is concemed with the satisfaction of both
the customers and the firm. The customers are in general believed to be
satisfied when the offered products meet their needs, desires and requests.
The firm is satisfied when exchanges result in profitability. This duality has
been called attention to in many publications since the marketing concept
came into use at the end of the 1940s. Nevertheless, the implementation of
the marketing concept has been rather heavily focused on the customers'
needs. Very few firms have knowledge of the costs incurred and the
profitability obtained by exchanges (e.g. Shapiro et al. 1987; Howell and
Soucy 1990; Foster et al. 1996; SOderlund 1997).
However, there has been a growing interest in market-oriented
managerial accounting (e.g. Ratnatunga et al. 1988; Ward 1992; Foster and
Gupta 1994; Best 2005). But only some attention has been directed to
customer accounting and customer profitability analysis (e.g. Anandarajan
and Christopher 1987; Storbacka 1995; Ittner and Larcker 1998; Cooper and
Kaplan 1999). On the other hand, within the marketing literature a lot of
effort has been made to prove the excellence of the marketing concept (Farrel
2002). These studies may be perceived as originating from different kinds of
marketing literatures that can broadly be divided into two main groups: (1)
market orientation and (2) customer relationship orientation.
According to the first group of approaches, customer responses are
perceived as only one set of consequences of the market orientation by a
firm. Two other sets of consequences are employee responses and business
performances (Kohli and Jaworski 1990, 1993). Various models and contexts

Are Loyal Customers Profitable? 247

have been used in an attempt to prove the superiority of the marketing
concept (e.g. Narver and Slater 1990; Jaworski and Kohli 1993; Farrel 2002).
However, these empirical studies are not analyzing relationships at the
customer level. Since this level of analysis represents the most important area
of the other main group of approaches, the rest of this article is based on this
literature.
Customer relationship orientation is based on conceptions about positive
cause- and effect relationships between the following main variables: (1)
antecedents of customer satisfaction, (2) customer satisfaction, (3) customer
loyalty, and (4) customer profitability (e.g. Reichheld and Sasser 1990;
Anderson and Mittel 2000). Some of the models that have been used, have
included other relationships, concepts, antecedents, intermediary variables,
etc. (e.g. Zeithaml 1988; Oliver 1996). The focus of this article is on the main
concepts.

Relationship no. 1: Antecedents of Customer Satisfaction -* Customer
Satisfaction

The concept of customer satisfaction has for years formed the cornerstone of
the marketing concept (e.g. Drucker 1954; Levitt 1960; Houston 1986;
Gr(^nroos 1990). Thus, measurements and analyses of customer satisfaction
and its antecedents are not new phenomena. A lot of studies have been
carried out. To explain variations in customer satisfaction several antecedents
can be taken Into consideration, for example price, quality, service,
expectations, etc. (e.g. Hausknecht 1990; Myers 1991; Oliver 1996; Szymanski
and Henard 2001).
However, during the last decade customer satisfaction has received a lot
more attention than earlier. The reasons are many, but some can be linked to
the increased attention concerning total quality management and national
quality awards (e.g. Garvin 1991; Heaphy and Gruska 1995; Hayes 1997). The
implementation of national customer satisfaction barometers may be another
reason (e.g. Fornell 1992; Johnson et al. 2001). In addition to analysis of
customer satisfaction and its antecedents, these approaches are also focusing
on effects of customer satisfaction.

Relationship no. 2: Customer Satisfaction —*• Customer Loyalty '.'

When judging candidates for quality awards, customer satisfaction results
along with activities and programs concerning customers and markets count
for a corisiderable part of the amount of points that can be obtained (about
20%). Some of the criteria are related to the consequences of customer
satisfaction. The main consequence is by many perceived to be customer

248 0yvind Helgesen

loyalty. Thus, the similarity with the national customer satisfaction
barometers is striking. An interesting example is the American Customer
Satisfaction Index (ACSI) (Fomell et al. 1996). This model consists of six
latent variables (customer expectations, perceived quality, perceived value,
overall customer satisfaction, customer complaints and customer loyalty).
Concerning customer loyalty Fomel et al. writes the following:

"Loyalty is the ultimate dependent variable in the model because of its
value as a proxy for profitability (Reich-held and Sasser 1990)" (Fornell et
al. 1996, p. 9).

However, linking these important relationships to only one study is at least
disquieting. Taking into account the large amounts of money that is spent on
various analyses of customer satisfaction, on the various national customer
indexes or barometers, and on total quality meinagement, there ought to be
more publications that are proving a positive relationship between loyalty
and profitability.

Relationship no. 3: Customer Loyalty — Customer Profitability
*

In a comprehensive analysis of publications for the period 1921-1987 Capon
et al. (1990) identified 320 empirical studies whose principal aim was to find
factors or variables that could explain variations in business performance.
Customer satisfaction or behavioural effects of customer satisfaction were not
utilised as explanatory variables in anyone of these studies.
Later on some studies have been carried out. However, in some of these
studies the measures of financial performances are on the business-level and
not on the customer-level (e.g. Anderson et al. 1994; Hallowell 1995; Ittner
and Larcker 1998; Yeung and Ennew 2000; Bernhardt et al. 2000; Yeung et al.
2002). In other studies the focus has been mainly on customer equity (e.g.
Blattberg and Deighton 1996; Berger and Nasr 1998; Anderson et al. 2004), or
mainly on customer profitability and not on the other main concepts of
customer orientation (e.g. Shapiro et al. 1987; Howell and Soucy 1990;
Storbacka 1995; Foster et al. 1996; Niraj et al. 2001; Reinartz et al. 2005).
Consequently, only a few studies have been focusing on the customer-level
(e.g. Reichheld and Sasser 1990; Soderlund and Vilgon 1995; Page et al. 1996).
However, SOderlund and Vilgon do not find support for a positive
relationship between customer loyalty and customer profitability. On the
other hand, Reichheld and Sasser and Page et al. are not preoccupied with all
the main concepts of customer relationship orientation. Besides, they do not
offer any solid (scientific) evidence for their findings. Thus most of the
studies dealing with relationship no. 3 are mainly based on the firm level or


business-unit level data and not on data of the individual customer-level.

Problems and Hypotheses

In this article the attention is directed to the last two relationships treated
above. And the problems that we are dealing with may be summarised as
follows: Does customer loyalty in-crease with increasing customer
satisfaction (is there a positive relationship)? Does customer profitability
increase with increasing customer loyalty (is there a positive relationship)?
Since the composition of the set of data is cross-sectional, only correlation
analyses are carried through, which imply that the following hypotheses are
going to be tested:

HI: The more satisfied a customer tends to be, the higher is the
loyalty of the customer.
H2: The more loyal a customer tends to be, the higher customer
profitability is obtained.

Research Design, Research Methods and Measurements

In order to test the formulated hypotheses there is a need for empirical data,
and in this study Norwegian exporters of klipfish and frozen fish are chosen
as a context. These types of products are based on groundfish as raw
material. This part of the Norwegian fishing industry is amongst other things
characterized by almost worldwide export activities orientated towards
various product markets (geographical areas). In each of these product
markets a lot of actors participate both on the buyer side and the seller side.
The products that are offered for sale may be perceived as generic and often
the Norwegian exporters are delivering products from more than one
producer. Usually, the importers buy products from several exporters that
are often located in different countries. This industry is suitable as a context
for the study, cf. the cost structure discussed below.
The empirical data are collected from four Norwegian exporters and their
customers. Two of the companies in the sample are exporting klipfish while
the other two are exporting frozen fish/filets. Information has been collected
by two means:

Customer accounts (order accounts) and profitability analysis based on
accounting information from the four exporting companies.
Market surveys (measurements of customer satisfaction, etc.) among the
customers of the four Norwegian exporters.

250 0yvind Helgesen

Customer Profitability Accounting — Customer Profitability r-^!

Establishing reliable profitability figures of customer accounts is not
straightforward. For in-stance can descriptive images of customer
profitability be established by using different estimation methods: (1) full
costing (the absorption method), (2) variable costing (the contribution margin
method), or (3) activity based costing (the "hierarchy-metiiod"). These
methods will of course tend to result in different designs of the specified
accounts. However, the most important aspect to remember is that different
approaches result in different estimates of customer profitability. Here the
ABC-approach is used.

Costs related to Business unit Cost driver
business unit

Market costs Market Cost driver

Customer costs Customer Cost driver

Revenue (price)
Order costs Cost driver

Figure 1. Market Hierarchy for Order-Handling Marketing Companies

Figure 1 shows the market hierarchy chosen and illustrates the assignment of
costs to the different levels. It also reflects the chosen market-oriented
accounting framework. Costs are assigned to the level where they are
incurred (orders, customers, markets, etc.). All the revenues are related to
the order level. The costs of the orders are subtracted from the revenues from
orders. In this way the results can be estimated for each order. Then
revenues and costs from orders are trarsferred to the customer level. The
customer result for a given period is the aggregate revenues from orders
related to the actual customer less the aggregate costs related to the orders as
well as the costs related to the customer. Analogously the market result and
the result of the strategic business unit for a given period are estimated. This


approach^ is consistent with the ABC-approach and the Nordic step analysis
(Bjornenak 1994).
The chosen context simplifies the assignment of costs because the product
costs of the exporting companies are easily found from the invoices received
from the producers^ and all the other costs of the exporters are different sorts
of marketing costs. Of course, all the accounts and all the vouchers still had
to be thoroughly revised, ln this way about 98.5 % of the total costs were
traced and assigned directly to the costs objects of the various levels of the
market hierarchy. Thus, only 1.5 % of the costs (indirect costs) had to be
accumulated into cost pools and allocated to the various cost objects
according to the ABC-approach.
Table 1 shows the lay-out of the customer account report, i.e. the main
items (cost groups), as well as the averages of the customer accounts of the
sample (n=71), and table 2 shows descriptive statistics for important items of
the customer accounts. Items resulting in reductions of the sales revenues
(quantity discounts, bonuses, etc.) are very moderate in this industry. Direct
product costs have a lot more to say, on the average representing about 91.4
% of customer revenues. These costs consist of purchasing and packaging
costs, inward freights and brokers' commissions. Direct marketing costs
related to orders and customers represent about 6.5 % of customer revenues.
These costs comprise sales and distribution costs (outward freights, transport
assurances and agent commissions); losses and activities established in order
to reduce losses (losses on accounts receivables, costs related to credit
insurance, commercial letters of credit, etc.); post-sale service costs (training,
support, complaints, etc.); the treatment of customers (travelling,
representation, exhibitions, advertisements and advertising campaigns, etc.);
other marketing costs (charges related to exportation, duties, taxes, etc.).
Direct customer-related capital costs represent about 0.6 % and consist of
discounting costs, capital costs^, bank costs, etc. The remaining costs may be
treated as indirect costs (fixed costs that are divisible) and allocated to the
different levels of the market hierarchy by way of ABC. Indirect costs related

2 The approach is also consistent with propositions formulated by Kaplan, referred to in
Robinson (1990). The principle abjective of Kaplan's speech was related to product costs, but
be also touched on customer accounts and distribution channels: "Another way to look at
operating expenses focuses on customers and distribution channels. We can compute the
margins earned by each customer or distribution channel by summing the product-level
margins of the products sold to each customer or through each chaimel and than subtracting
expenses incurred for individual customers or chamiels. We need to find out what causes
expenses to vary and at what level of the organisation, but expenses need not and should not
be allocated below the level at which they are incurred" (Kaplan/Robinson 1990, p. 13).
3 In addition to current costs one has to consider calculated costs. For instance, direct order-
related capital costs often have to be estimated so that the costs are corresponding with the
real credit time. But such kinds of problems are not typical for market-oriented accounting.
Analogous problems are usually met in other fields of managerial accounting.

252 0yvind Helgesen

Table 1. Customer Accounts - Averages (n=71) - -, •

NOK %
Customer revenue (CR) 1 303 890 100.00
Customer revenue reductions 247 0.02
Net customer revenue 1303 643 99.98
Direct customer product costs 1191 621 91.39
Customer product margin (CPM) 112022 8.59
Direct order-related marketing costs 83 962 6.44
Direct customer-related marketing costs 460 0.04
Customer operating margin (COM) 27 600 2.11
Direct customer-related capital costs 7 567 0.57
Customer margin (CM) 20 033 1.54
Indirect order-related costs 8196 0.63
Indirect customer-related costs 1795 0.14
Customer profit (CP) 10 042 0.77

Table 2. Descriptive Statistics for Important Items of the Customer
Accounts (n=71)
Arithmetic Standard 10. 90.
Absolute figures: mean deviation percentile percentile
Customer revenue (CR) 1 303 890 1 758 844 47 244 3 879 355
Direct customer product costs 1 191 621 1 637 546 52 046 3 730 551
Customer product margin (CPM) 112 022 137977 146 302 092
Direct order-related marketing 83 962 121135 649 197 804
costs
Customer operating margin 27600 54 354 -12052 100 252
(COM)
Direct customer-related capital 7567 18440 0 31415
costs
Customer margin (CM) 20 033 46 294 -12 052 82 324
Indirect order-related costs 8196 8 791 1588 17109
Indirect customer-related costs 1795 2181 109 4 955
Customer profit (CP) 10 042 46 513 -21 282 69101
Relative figures:
Direct customer product costs 91.39 4.37 85.89 96.07
Customer product margin (CPM) 8.59 436 3.93 13.95
Direct order-related marketing 6.44 2.99 3.83 10.60
costs
Customer operating margin 2.11 3.70 -2.10 5.77
(COM)
Direct customer-related capital 0.57 0.97 0.00 2.33
costs
Customer margin (CM) 1.54 3.41 -2.10 4.51
Indirect order-related costs 0.63 0.92 0.10 1.30
Indirect customer-related costs 0.14 0.33 0.01 0.38
Customer profit (CP) 0.77 3.32 -2.68 2.71


to orders and customers represent about 0.8 % of customer revenues. Thus,
on the average the customers are only marginally profitable. The direct and
indirect costs related to the market level and the business level of the market
hierarchy represent only about 0.5 % of the total costs. Nevertheless, the
profits of the businesses are rather modest.
The rearrangement of the accounting figures was worked out in close
collaboration with the marketers, accountants and managers of the exporting
companies. There was no disagreement concerning the results. The orders
included in the sample were selected at random in such a way that several
succeeding orders were analysed in order to simplify the balancing work.
The sample, representing about 2 % of the total Norwegian exports of
products from these lines of business, is analysed at the market level,
comparing the four exporters' mairket-revenue figures with the total
Norwegian export for these lines of business for the period under
consideration to each of the 36 geographical markets. The analysis shows a
strong and significant correlation (r=0.804; p<0.001). In addition, the 20-25
most important geographical markets for this part of the Norwegian fishing
industry are represented in the sample. Thus, it may at least be asserted that
the sample is not non-representative of the population.
Table 3 presents descriptive statistics for each of the customers for the
main concepts of the customer relationship sample, i.e. customer satisfaction,
customer loyalty and customer profitability for each individual customer of
the sample. Relative customer results (customer revenues minus all direct
and indirect costs as a proportion of customer revenues) are used as
measures of customer profitability. The average customer is unprofitable (-
2.2 %), but the variation is rather high. It should be noted that even if the
average customer is unprofitable, still the business unit is profitable, cf. table
1. Note that the customer result of the average customer is not the same as
the average customer result. Of course, you have to take into consideration
that the customer revenues (volumes) do vary.

Customer Survey

In order to collect perceptual data to reveal the satisfaction of the customers
with the four Norwegian exporters, a questionnaire was distributed to the
customers. The questionnaire was examined by experts, both business people
and academicians, (face validity), pre-tested, then adjusted somewhat and
sent to 244 customer. That includes all the customers* that had placed orders
during the last year. In order to compensate for return postage a small gift (a

* Cover letter and questionnaire was translated to English, French, Gennaxv Italian,
Spanish and Portuguese.

254 "
• 0yvind Helgesen

Norwegicin pin) was enclosed. Two reminders^ were sent in such a way that
30 days passed between each mailing. 128 questionnaires were returned of
which 124 were usable. Thus the response rate was about 51 %.

Customer Satisfaction

The customer satisfaction concept may be perceived and measured in
different ways (Hausknecht 1990, Myers 1991, Ryan et al 1995, Oliver 1996).
In this study customer satisfaction is measured by using two variables. One
of these variables is used to express fulfillment and the other is used as a
standard for comparison (Oliver 1996). For each statement or question in the
questiormaire a line with a length of 10 cm was presented, and the
respondents were asked to simply put a mark (tick, point, etc.) on that line
which was placed to the right of the question. The measure of customer
satisfaction was found as the average of the two responses made. Cronbach's
Alpha has the value of 0.86.
The two statements used to measure customer satisfaction are both
measured on an ordinal level. However, the chosen procedure of
measurement with a great number of response alternatives may justify that
the analysis is carried out as if the variables are measured on an interval level
(e.g. Asher 1983, Byrne 1998). Thus, customer satisfaction is perceived as a
continuous variable according to the common suppositions when doing such
an analysis.
It appears that the average score of customer satisfaction is 67.9 but the
variation is high, cf. table 3. This satisfaction-level is common for foods (see
e.g. Fierman 1995, various National Customer Barometers).

Customer Loyalty (Action Loyalty)

Customer loyalty may be related to various characterisations or phases
(Oliver 1996): (1) cognitive loyalty, (2) affective loyalty, (3) conative loyalty,
and (4) action loyalty. Thus, the concept may be perceived and measured in
different ways (e.g. Hirschman 1970; Innis and La Londe 1994; Magi 1999).

5 Each questionnaire was openly coded so that the reminders only were sent to the
non-respondents. But this procedure also made it possible to combine information in
such a way that the formulated hypotheses could be tested. In the cover letter the
attention of the respondents were directed to the codes that were placed on the last
page of the questionnaire. No remarks were made. Furthermore, all information has
been analysed and presented in such a way that answers are untraceable. It can with
good reason be asserted that questionnaires not were answered anonymously.
However, in what other way should the information from the respondents then be
obtained to match perceptual data with behavioural data for each customer in the
sample?


Table 3. Descriptive Statistics for Customer Satisfaction, Customer Loyalty
and Customer Profitability (n=71)

Arithmetic Standard 10 90
mean deviation percentile percentiJe
Customer satisfaction 67.9 21.4 36.5 92.9

Customer loyalty 13.4 24.5 0.1 57.7

Customer profitability - -2.2 10.4 -11.1 4.7
relative figures

Often loyalty is equated with future behavioural intentions. However, I agree
with Olivia et al. (1992, p. 85) when the argumentation is that "an intention is
only a tentative measure of behavioural loyalty". Consequently, customer
loyalty is measured as the share of the total purchases a customer buys from
a particular supplier (given a particular product and a given particular
period of time) (Peppers and Rogers 1995).
In the survey the customers were questioned about their total purchases
in the line of business under consideration, i.e. both with respect to the total
value and the total number of orders. The total sales of the exporters to each
of the customers were found in the ledger of accounts for the debtors, i.e.
both the total value and the total number of orders. Customer loyalty is then
estimated as the proportion of the value of purchases, i.e. an estimation of the
customer's action loyalty. It appears that the average proportion is 13.4 but
the variation is high, cf. table 3. In addition the proportion of numbers of
orders placed with the exporter of the total number of orders with respect to
this line of business was calculated. The Pearson's correlation coefficient
between this measure and customer (action) loyalty is strongly positive and
statistical significant (r=0.558, p<0.01; n=57) which gives support to the
estimates of the shares of the customers.

The Relationship Sample - Some Additional Comments

Table 3 presents descriptive statistics for the relationship sample consisting
of 71 customers. Each existing sub-sample had a little higher number of
answers than the relationship sample (profitability sample: n=176,
satisfaction sample: n=116, loyalty sample: n=94). Comparing the
relationship sample with each of the existing rest samples by way of t-tests
does not reveal any significant differences (p<0.05). Thus, it may at least be
asserted that the relationship sample is not non-representative of the total
sample of the study.

256 0yvind Helgesen

Findings

Regression analyses (OLS) are used to test the two hypotheses. In order to
comply with methodical requirements, two of the variables have to be
transformed* before analyses are carried out. Such transformations result in
non-linear relationships between the original variables. As a starting point
one has to take into consideration that such relationships are results of the
transformations and not consequences of suppositions that the relationships
between the variables are non-linear.

HI: The more satisfied a customer tends to be, the
higher is the loyalty of the customer

Table 4 presents the estimates of the regression coefficients and the t-values,
etc. The regression model is significant at the 0.01-leveI. However, variations
in customer satisfaction explain only about 10 % of the variations of customer
loyalty (repeat patronage). To explain the remaining part of the variations
one has to search for other explanatory variables.

Table 4. Customer Satisfaction and Customer Loyalty at the Customer
Level - Estimates of Regression Coefficients, etc. (n=71)

Arithmetic Standard- Std. coeff.
mean error beta
Constant -0.528 0.544 -0.971
"Customer Satisfaction" 0.00027 0.001 0.318 2.786a
a p<0,01

Because of the transformations of the variables, the shape of the relationship
between the original variables is not easily seen. Based on the estimates
above this relationship is therefore presented in figure 2. The correlation
between the variables seems to be positive, but declining. Thus, it seems that
the more satisfied a customer is, the more loyal the customer is. However, the
degree of correlation is degressive (the relationship is weakening gradually).
The results do support the formulated hypothesis that "the more satisfied a
customer tends to be, the higher is the loyalty of the customer" (HI).

• Two new variables are established. Customer satisfaction is squared, and for
*
customer loyalty the natural log-function is used.


1,0

I—<
I

o

a
o
O
,4

.2
a
o ,1
O
0.0
50 55 60 65 70 75 80 85 90 95 100

Customer Satisfaction (0-100)

Figure 2. Customer Satisfaction and Customer Loyalty at the Customer
Level (n=71)

The relationship may be interpreted as if the satisfaction level has to pass a
certain threshold if it is going to have any "influence" on customer loyalty.
This finding is in accordance with earlier studies (Paltschik and Storbacka
1992; Keiningham et al. 1999; Anderson and Mittal 2000). Furthermore it
seems that the relationship is degressive, which means that increased
customer satisfaction beyond the "zero-point" has a diminishing effect on
increased customer loyalty. This result is also in accordance with earlier
studies and theoretical reflections (Storbacka 1995; Ittner and Larcker 1998).

H2: The more loyal a customer tends to be, the higher
customer profitability is obtained

Table 5 presents the estimates of the regression coefficients and the t-values,
etc. The model is significant at the 0.01-Ievel. However, variations in
customer loyalty explain only about 10 % of the variations of customer
profitability.

258 0yvind Helgesen

Table 5. Customer Loyalty and Customer Profitability at the Customer
Level - Estimates of Regression Coefficients, etc. (n=71)

Arithmetic Standard- Std. coeff.
mean error beta t
Constant -3.426 1.255 -2.730a
"Customer loyalty" 1.540 0.539 0.325 2.856a
a p<0,01

Because of transformations the shape of the relationship between the original
variables is not easily seen. Based on the estimates above this relationship is
presented in figure 3. The correlation between the variables seems to be
positive, but declining. This result provides support for the formulated
hypothesis that "the more loyal a customer tends to be, the higher is the
obtained customer profitability" (H2).

Customer Loyalty (Customer Share) (0-1,0)

Figure 3. Customer Loyalty and Customer Profitability at the Customer
Level (n=71)

The relationship seems to be degressive, which indicates that increased
customer loyalty has a positive "effect" on customer profitability, but at a
decreasing rate. Several arguments can be used to explain such a relationship
between the variables (e.g. Paltschik and Storbacka 1992; Rust and Zahodk
1993; Anderson and al. 1994; Anderson and Mitte! 2000). According to the


estimates, customer loyalty has to be above a certain level in order to have
any "influence" on customer profitability.

Discussion and Managerial Implications

The findings above are in accordance with the marketing concept and the
customer relation-ship orientation. There seems to be a positive relationship
between customer satisfaction and customer loyalty, and there also seems to
be a positive relationship between customer loyalty and customer
profitability. Thus, support is provided for the formulated hypotheses which
both are in accordance with the basic theories of marketing (the marketing
concept).
The two relationships under consideration are both found to be non-
linear. Both the relationship between customer satisfaction and customer
loyalty and the relationship between customer loyalty and customer
profitability seem to be positive at a declining rate. In addition, it seems that
the anticipated independent variables have to pass a certain level in order to
have an impact on the anticipated dependent variables. It is probably of great
interest for the managers to get further insight into these relationships
including thresholds for the variables under consideration.
According to the marketing concept, managers should be preoccupied
with meeting the needs, desires and requests of customers in order to
increase their satisfaction. Consequently it is very important to reveal which
ones of the antecedents of customer satisfaction that have the strongest
impact on customer satisfaction. Therefore questions related to various
antecedents are included in questionnaires when doing customer satisfaction
surveys. This link of the "satisfaction-profit chain" is not treated here.
However the point to note is that the activities related to the achievement of
the satisfaction of customers are not without costs. Therefore all the links of
the relationship should be thoroughly analyzed, aiming at both higher
customer satisfaction (customer value) and higher customer profitability
(customer equity) (see McNair et al. 2001).

Limitations and Implications for Future Research

The sample of this study only consists of 71 respondents. Still, the number of
respondents is satisfying in relation to the statistical methods used. Besides,
the other respondents of the total sample are used to validate the results
presented. Nevertheless, if the number of respondents had been higher, a
more comprehensive analysis could have been carried out, that is an analysis
that simultaneously takes into consideration all levels and all variables of the
four links of the model of customer relationships. Even though this particular

260 0yvind Helgesen

limitation does not have any effects concerning the statistical conclusive
validity of the findings, it has an impact on the overall understanding of the
relationships under consideration. Thus, more respondents could have
increased the insight gained by the models, i.e. the relationships between
antecedents of customer satisfaction, customer satisfaction, customer loyalty
and customer profitability.
Besides, it should be emphasised that only one analysis with a context
taken from order-handling industry which in this study is Norwegian
exporters of fish products and their customers, may not be perceived as
sufficient for the documentation of this "much talked about relationship".
Therefore more analyses should be carried out and published.
With respect to profitability the marketing concept is founded on a long-
term perspective. Thus, the analyses should be based on a time series desig^i
£ind not on a cross-sectional design as presented in this paper. By collecting
necessary data over time various analyses of causes and effects may be
carried out. And such analyses are prerequisites for maintaining the positive
links between customer satisfaction and long-term profitability.
The results show that variations in customer satisfaction only can explain
about 10 % of the variations of customer loyalty. Analogously, variations of
customer loyalty only can explain about 10 % of the variations of customer
profitability. Concerning the relationship between customer satisfaction and
customer loyalty the degree of explication is rather low. However, it should
be noted that loyalty has been measured as action loyalty. Concerning the
relationship between customer loyalty and customer profitability,
comparisons are much more difficult to carry out for the reason that only a
few studies exist and these studies are not based on customer accounts at the
individual customer level. However, the same degree of explication is found
in studies based on variables on the business-level (see e.g. Ittner and Larcker
1998; Yeung et al. 2000). Thus other variables also should be included in the
research models.

Conclusion

Customer relationship orientation is based on conceptions about positive
cause- and effect relationships between the following main variables: (1)
antecedents of customer satisfaction, (2) customer satisfaction, (3) customer
loyalty, and (4) customer profitability. Even if the number of customer
relationship oriented studies has increased enormously during the last
decade, the attention has for the most part been devoted to concepts and
relationships which may explain variations in customer loyalty. Only a few
studies are considering consequences of customer satisfaction and customer
loyalty on profitability. Furthermore, the few publications that exist are for


the most part preoccupied with analyses of customer bases and are using
measures of average costs related to the customers when estimating
customer profitability.
In this paper the last two relationships have been analyzed at the
individual customer level. Positive links have been found between the
variables, but in such a way that the relationships seem to have degressive
shapes. Thus, there seems to be a positive relationship between customer
satisfaction and customer loyalty, and there also seems to be a positive
relationship between customer loyalty and customer profitability. Taking
into consideration the statistical conclusive validity of the findings, it may be
maintained that the study has put forward evidence for the "much talked
about relationship", i.e. "the customer satisfaction paradigm" which forms
the cornerstone of the marketing concept. But, as underlined earlier, more
studies are highly recommended.

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About the Author

Dr. oecon, 0yvind Helgesen is Associate professor at the Institute of
Intemational Marketing of Alesund University College in Norway. He has
obtained the following degrees at the Norwegian School of Economics and
Business Administration in Bergen (Norway): Sivil0konom (1973),
Sivil0konom HAE (1976) and Dr. oecon. (PhD) (1999). A Post-Graduate
Certificate in Education was obtained at the University of Bergen in 1975.
Since 1976 he has been living and working in Alesund which is the centre of
Sunnmore. This district at the north-western part of the Norweigian west-
coast is characterised by a high degree of industrialisation and
intemationalisation. During the years 1976-1992 Helgesen was working in
three differenct companies in the service industry as Senior Business
Advisor/Director of Finance and Accounting/Managing Director. Since
1993 he has been working at Alesund University College. However, for three
years (1996-1999) he was seconded to M0re Research Institute, Alesund, and
the Norwegian School of Economics and Business Administration, Bergen.
During that period he was working with his doctoral dissertation as well as
with other research issues. In the years 2000-2003 Helgesen was working
part-time for Alesund University College and part-time for Sparebanken
M0re in Alesund, one of the greatest savings bank in Norway. He was then
working with various research and development projects, for the most part

266 • 0yvind Helgesen

related to customer issues. His teaching, working and research activities are
related to marketing and management accounting (corporate strategy,
international marketing, market research, CRM, etc.). He likes to have one
foot in the economic life and the other in the academic life.

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